Bernard Madoff - Ponzi Scheme

Case Study: Bernard Madoff –Ponzi Scheme

Date: 12/7/2015

INTRODUCTION

Bernie Madoff is a former stockbroker, investment advisor, financier and an all-around swindler convicted of fraud. He is the former non-executive chairman of the NASDAQ stock market. Madoff Investment Securities LLC was one of the top market businesses on Wall Street.  Madoff was the admitted operator of a Ponzi scheme that is considered to be the largest financial fraud in U.S. history [1]. The Madoff investment scandal tricked thousands of investors of billions of dollars. In 2008, Madoff's sons told authorities that their father had confessed to them that the asset management unit of his firm was a massive Ponzi scheme. FBI agents arrested Madoff on December 11, 2008, on one count of securities fraud for allegedly operating a multibillion-dollar Ponzi scheme from his investment advisory business. On June 29, 2009, Madoff was sentenced to 150 years in prison, the maximum allowed.

HISTORY OF OPERATIONS [2] 

1958

• Avellino joins Saul Alpern (Madoff's father-in-law) in his accounting business.

1960

• Bernard L. Madoff starts Bernard L Madofff Investment Securities (BLMIS) with $5,000.

1962

• Madoff begins managing investments channeled through Alpern & Avellino

1963

• SEC launches investigation of Bernard Madoff's mother, Sylvia R. Madoff (Gibraltar Securities) and others in August 1963

1968

• Bienes joins Avellino to form the accounting firm Avellino & Bienes (A&B)

1970 – 1990

• Madoff's trading business skyrockets
• A&B gradually shift their focus from accounting to raising money for Madoff
• 1970 Peter Madoff joins Bernard L. Madoff Investment Securities (BLMIS)
• 1977 Madoff allegedly begins a new options strategy – broad-based portfolio of S&P securities and hedged with derivatives

1983

• 1983 -1984 Ira SORKIN serves as SEC Regional Director
• Madoff elected to NASD Advisory Counsel.

1984

• Walter Noel and Jeff Tucker of Fairfield Greenwich start Fairfield Sentry Limited and invest all $4 million with Madoff
• Madoff elected to NASD Board of Governors

 1990

• 1990-1993 Madoff serves as Chairman of NASDAQ
• Merkin gives Madoff “a significant portion of the assets” of two of his hedge funds – Ariel and Gabriel. Merkin creates Ascot Partners IP and Ascot Fund Limited – managed exclusively by Madoff.

 1992

• SEC launches investigation into A&B fearing a Ponzi Scheme – based on a tip. A&B pays a fine. Madoff claims ignorance, returns the lion's share of the money to A&B to distribute to their clients, but shortchanges them $18 million.
• A&B hires Sorkin (on Madoff's recommendation) to present them in the proceedings with the SEC and bankruptcy Trustee
• Sancra Manzke, founder of Tremont and MAXAM meets Madoff and Madoff, whose investment advisory business is not registered with the SEC, insists she does not publicly name him in her prospectus. Also tells her that he makes money via commissions vs traditional fees.
• Federal judge orders Price Waterhouse to audit the financial statements of A&B who refuse. Neither the court nor the SEC pursues this refusal.
• Lee Richards is court-appointed Trustee in the A&B bankruptcy proceedings.
• Peter Madoff elected Vice Chairman of NASD
• Martin Kupferberg, SEC Sr. Associate Regional Administrator in New York refuses to disclose the name of the broker dealer in the Avellino and Bienes case, but says, “Right now, there's nothing to indicate fraud.” This comment was never retracted.
• WSJ identifies firm investigated in A&B fraud case as BLMIS and again says there's been no evidence of fraud.

2000

• Harry Markopolos submits an 8-page memorandum outlining his concerns to the SEC's Boston office. The memorandum outlines the fraud and gives clear red flags to the SEC in May 2000.

2001

• Fairfield Greenwich partner Jeff Tucker meets with Madoff to verify Madoff's holdings – now worth about $3 billion. Meets with Madoff and Di Pascali who shoed Tucker trades, named a 3rd party who had cleared them but did not ask for verification, nor did he visit the firm's 17th Floor offices in May 2001. Markopolos resubmits his initial 8-page document

 2005

• Markopolos meets (at Markopolos' request) with Mike Garrity, SEC Boston Branch Chief on October 25, 2005.
• Markopolos emails Meaghan Cheung, SEC NY Branch Chief, identifies himself as the whistleblower and attaches a revised 21-page report detailing fraud on November 4, 2005

2006

• Madoff is interviewed by the SEC but admits (in confession to FBI) that he lied to investigators in January 2006.
• Meaghan Cheung AGAIN dismisses Markopolos (5 minute phone call) on March 3, 2006.
• SEC and WSJ ignore pleas from Chicago Board Options Exchange to investigate on September 29, 2006. More money flows into Madoff with the collapse of Lehman Bros in November 2006
• SEC finds “no evidence of fraud,” though concluded that Fairfield Greenwich needed to revise its disclosures. Recommends files to the destroyed in November 2006

2007

• Shana Madoff, Peter Madoff's daughter, marries former SEC attorney Eric Swanson
• Markopolos again emails Meaghan Cheung (NY Branch Chief) and Ed Manion, Boston office on June 29, 2007.

2008

• Madoff pushes Fairfield Greenwich to raise more money. Fairfield Greenwich starts a massive fundraising campaign for a new fund. Tucker sends letter to Madoff apologizing for redemptions on January 1, 2008
• Madoff tells sons he's facing $7 billion in redemptions. Tells Ruth to wire transfer money from a brokerage acct to her personal banking account on September 1, 2008.
• Lee Richards appointed as the receiver for BLMIS in December 2008
• Madoff allegedly confesses to sons on December 10, 2008.
• Madoff turns himself in. Government files criminal fraud charges against Bernard Madoff on December 11, 2008.
• Thierry de la Villehuchet commits suicide on December 22, 2008.

2009

• Madoff tries to mail packages with jewelry and watches worth millions to family and friends on January 5, 2009.
• Madoff pleads guilty on March 10, 2009
• Madoff pleads guilty to US Government criminal fraud complaint on June 15, 2009.

CASE FACTS

Madoff turned into a trading powerhouse, gaining much notoriety on Wall Street throughout his long career. However, on December 11, 2008, Bernie Madoff was arrested for running the largest Ponzi scheme in history.

A Ponzi scheme is a fraudulent investment operation in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors Although these schemes can go on for a very long time, they will eventually collapse due to the fact that the actual earnings (if there even are any) are less than those being paid to investors [3]. At the time the scandal was uncovered, the investor statements to Madoff’s clients totaled almost $65 billion. However, it has since been revealed that only about $17.3 billion of this had actually been legitimate. The scheme had been going on for around 20 years by the time it was uncovered. On March 10, 2009, Bernard Madoff was charged March 10 in federal court in Manhattan with 11 counts related to the largest Ponzi scheme in U.S. history. These included charges of securities fraud, money laundering, and perjury.